Report of the Measurement Review for a New Zealand living wage - Prepared for Living Wage Movement Aotearoa NZ Charles Waldegrave, Peter King and ...
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Report of the
Measurement Review
for a New Zealand
living wage
Prepared for Living Wage Movement
Aotearoa NZ
Charles Waldegrave, Peter King
and Michaela Urbanová
Family Centre Social Policy Research Unit
March 2018
1Contents
Executive Summary .............................................................................................................. 5
Five Year Measurement Review ........................................................................................ 5
Key concepts in the rationale of a living wage ................................................................... 6
Calculating living wage estimates for each item................................................................. 7
The 2018 Living Wage....................................................................................................... 8
Introduction ......................................................................................................................... 10
Five Year Measurement Review ......................................................................................... 11
Key concepts in the rationale of a living wage ..................................................................... 14
A living wage is a market wage ....................................................................................... 14
The living wage is not mandatory .................................................................................... 14
Household of 2 adults and 2 children ............................................................................... 15
1.5 incomes ..................................................................................................................... 15
Calculating living wage estimates for each item .................................................................. 17
Food ................................................................................................................................ 17
Clothing and footwear ...................................................................................................... 18
Rents ............................................................................................................................... 18
Household energy ........................................................................................................... 18
Household contents and services .................................................................................... 19
Health .............................................................................................................................. 20
Transport ......................................................................................................................... 22
Communication ............................................................................................................... 23
Recreation and culture .................................................................................................... 24
Education ........................................................................................................................ 24
Miscellaneous goods and services .................................................................................. 25
Other expenditure ............................................................................................................ 25
The 2018 Living Wage ........................................................................................................ 27
References ......................................................................................................................... 29
Appendix 1. ......................................................................................................................... 30
The Household Economic Survey.................................................................................... 30
Appendix 2. ......................................................................................................................... 34
Estimated Food Costs information ................................................................................... 34
Appendix 3. ......................................................................................................................... 37
The Tenancy rent bond database .................................................................................... 37
2Market rents information .................................................................................................. 37
Appendix 4. ......................................................................................................................... 39
Inland Revenue Department income tax rates information............................................... 39
Tax calculation formulae .................................................................................................. 39
A further explanation of equation content ........................................................................ 40
Appendix 5. ......................................................................................................................... 42
Work and Income Accommodation Supplement information ............................................ 42
Accommodation Supplement formula (Non-beneficiaries) ............................................... 42
Appendix 6. ......................................................................................................................... 43
Working for Families family and in-work tax credits ......................................................... 43
Appendix 7. ......................................................................................................................... 44
Stata15 code for calculating gross and net income equivalence ...................................... 44
Code: .............................................................................................................................. 44
Table 1. HES Clothing and footwear ................................................................................... 18
Table 2. Calculation of weighted average household energy cost ....................................... 19
Table 3. HES Household contents and services.................................................................. 20
Table 4. GP average annual service utilisation and fees by age group ............................... 20
Table 5. HES Health ........................................................................................................... 21
Table 6. HES Transport ...................................................................................................... 22
Table 7. Broadband internet prices ..................................................................................... 23
Table 8. Mobile phone monthly plan prices ......................................................................... 23
Table 9. HES Recreation and culture .................................................................................. 24
Table 10. State school costs from the NZCER survey for one primary school student ........ 24
Table 11. HES Miscellaneous goods and services .............................................................. 25
Table 12. HES Other expenditure ....................................................................................... 26
Table 13. 2018 itemised Living Wage Estimate ................................................................... 27
Table 14 HES Food ............................................................................................................ 30
Table 15 HES Clothing and footwear .................................................................................. 31
Table 16 HES Rents ........................................................................................................... 31
Table 17 HES Household energy ........................................................................................ 31
Table 18 HES Household contents and services................................................................. 31
Table 19 HES Health .......................................................................................................... 31
Table 20 HES Transport ..................................................................................................... 32
Table 21 HES Communication ............................................................................................ 32
Table 22 HES Recreation and culture ................................................................................. 32
Table 23 HES Education ..................................................................................................... 32
Table 24 HES Miscellaneous goods and services ............................................................... 33
Table 25 HES Other expenditure ........................................................................................ 33
Table 26. Food cost estimates for various household compositions .................................... 35
Table 27. Food cost estimates by city, gender and age....................................................... 36
Table 28. PAYE rates for the year 1 April 2018 31 March 2019 .......................................... 39
Figure 1. Information and data sources included in the review. ........................................... 13
3Figure 2. Accommodation Supplement income cut-out points and entry thresholds and
maximum payments for non-beneficiary couple with children households ........................... 42
4Executive Summary
Introduction
N.B. See main text for references
Since the first Living Wage report in 2013, significant progress has been made by Local
Authorities and the New Zealand Parliament, each of whom are at various stages of
becoming Living Wage Employers. Organisations and small businesses including for
example, economic group BERL, the Wiri Licensing Trust and the New Zealand Nurses
Organisation have become accredited Living Wage Employers, while energy company
Vector Ltd has become the first large corporate enterprise to become accredited.
New Zealand is unfortunately a low wage economy when compared with like countries,
being 18th on the OECD’s ranking of average wages out of 35 countries. Australians on
average earn 32 percent more than New Zealanders, Canadians 22 percent more and
British workers 9 percent more. It therefore figures that Australia has had little interest in a
living wage movement, while the UK, Canada and New Zealand have developed strong
movements. New Zealand being the laggard in wage levels. The Ministry of Social
Development’s Household Incomes in New Zealand report finds that 40 percent of children
in poverty have at least one adult in their family in full-time employment or self-employed.
This report discusses the income research carried out by the Family Centre Social Policy
Research (FCSPRU) to provide an empirical basis for determining the level of a living wage
for New Zealand, and its annual adjustments in relation to wage movement in the market. A
clear empirical basis for setting the living wage has to draw on the most up to date data
available on the range of items required to live with at least minimal comfort and enable
participation in society.
The living wage is defined by Living Wage Movement Aotearoa NZ as:
the income necessary to provide workers and their families with the basic necessities of life.
A living wage will enable workers to live with dignity and to participate as active citizens in
society.
Participation refers to more than survival on the basic necessities, because it involves the
ability to participate socially and even consider the future like a modest insurance policy. It
embraces small but important things like being able to pay for children to enjoy a school trip,
having a computer in the home and being able to mix with friends recreationally, albeit
modestly.
Five Year Measurement Review
The original living wage rate in 2013 was set at $18.40 per hour, which if earned by 1.5 full-
time adults over the course of the year would be sufficient for a household of 2 adults and 2
children to live modestly and participate in society. The FCSPRU with the Living Wage
research peer group decided that because the living wage was a wage in the market, the
updates should relate primarily to movements in wages. The movement in the average
ordinary time hourly rate, as provided by Statistics New Zealand’s Quarterly Employment
Survey (QES) was chosen to set the level for each annual update. However, it was also
agreed that every five years, the methodology would be reviewed and if new databases or
information sources enabled improved accuracy of the estimates, they would be
5incorporated. It was also stated in the original report that if government transfers, particularly
through tax changes occurred, then they would need to be incorporated into the following
year’s living wage adjustment.
This year 2018 is the year set aside for the first measurement review. New and appropriate
information sources and databases have enabled FCSPRU to estimate more items from a
needs-based perspective, rather than estimates that are simply taken from the Household
Economic Survey (HES) which calculates expenditure by different income groups. FCSPRU
already had needs-based estimates for food and rent costs and through the review they
have been able to extend that to household energy, health, communication and education
estimates.
The significant increase in disposable income for families with dependent children
announced by government in the Families Package late last year, has been incorporated
into the 2018 living wage estimate.
Key concepts in the rationale of a living wage
A living wage is an individual market wage. If it is paid at a level to support a household of 2
adult + 2 children on 1.5 incomes (one working adult full-time and another half time over 60
hours per week between them). The market pays a wage for workers to do particular jobs
regardless of their family size, medical needs or other financial obligations. It has to be
pitched somewhere and living wage movements internationally pitch it in relation to a family
with children, because society is poorer if working families with children are still below the
poverty threshold.
This is in contrast to a targeted welfare transfer. Targeted welfare transfers such as the
domestic purposes benefit, the unemployment benefit and child tax credits are paid
differently according to family size, particular needs and housing costs. The living wage is
different. It is a market wage paid by employers, a market mechanism that is directed to lift
the incomes of low paid workers, and it certainly achieves that.
A living wage attempts to address wellbeing in our community and, in particular, the problem
of employees at the lower income end becoming increasingly socially excluded. Often, they
struggle to afford even basic necessities, let alone live with dignity and participate as active
citizens in society, despite the fact they are working full time. It is not compulsory, nor is the
living wage movement anywhere in the world seeking to make it compulsory. It carries moral
force and tests business ethics. The living wage enables an employer to know that what s/he
pays a worker is sufficient for them to live modestly and participate in society.
The household composition of 2 adults and 2 children chosen in the original Report is pretty
much in line with other jurisdictions for good reasons. If a living wage is to enable workers to
live with dignity and to participate as active citizens in society, it must be sufficient for
families with children. In other words, the adult earners in the household between them need
sufficient income to be able to at least participate modestly in society with their children. If
two incomes, one being fulltime, can’t afford that, then it is less than a living wage. Two
adults and two children were chosen as the household composition for these reasons and
also because it is a common NZ family size.
The original Report chose two incomes because the Statistics New Zealand Household
Labour Force Survey (HLFS) results for June 2012 show that in 68.5 percent of households
with two adults and two dependent children, both adults were income earners. For the June
62017 quarter, both adults were employed in 74.5 percent of 2A+2C households (Statistics
NZ 2017). It chose 1.5 incomes to allow one parent to be home with their children for half a
working week however that may be divided. This is similar to the average of four like
jurisdictions (USA 40 hours, UK 55.5 hours, New Zealand 60 hours and Canada 70 hours) at
56.38 hours, not that far from the 60 hours chosen in the original Report. The parameters
are judgements as to what is considered reasonable in order for a family in New Zealand to
live with dignity and to participate as active citizens in society.
Calculating living wage estimates for each item
In the review the researchers found new and appropriate information sources and databases
that enabled them to estimate more items from a needs-based perspective, rather than
estimates that are simply taken from the Household Economic Survey which calculates
expenditure by different income groups. The living wage settings already used needs-based
estimates for food and rent costs and through the review they have been able to extend that
to household energy, health, communication and education estimates. For the other six
budget items the estimates are based on HES data because no needs-based estimate could
be found.
The expenditure items selected earlier and for this review, were from HES and included:
food; clothing and footwear; actual rent costs for housing; household energy; household
contents and services; health; transport; communication; recreation and culture; education –
primary and early childhood; miscellaneous goods and services; and other expenditure e.g.
exceptional emergencies, non-mortgage interest payments. In line with research in other
countries, expenses were calculated for a household of two parents and two children with
one full-time adult earner and another part-time earner on half full-time hours.
This year 2018, was the year set aside for the first measurement review. New and
appropriate information sources and databases were found that enabled estimations of six of
the twelve budget items from a needs-based perspective. Prior to this year only two out of
twelve had been applied.
The Otago University’s Food Cost Survey and MBIE’s Rent Bond database continue to
provide the best estimates for food and rent costs respectively. Otago University
Wellington’s Housing and Health research programme, the Building Research Association of
New Zealand (BRANZ) Household Energy End-Use Project (HEEP) and the Institute of
Professional Engineers (IPENZ) Multi-disciplinary investigation of energy use in New
Zealand households provides a more accurate basis to establish the energy consumption in
Kilowatt hours (kWh) required to maintain a three bedroom house at a healthy temperature
throughout the year and also meet other energy requirements.
The Ministry of Health’s service utilisation information collected from District Health Boards
(DHBs) and Primary Health Organisations (PHOs) provides GP visits by age group and fees.
Pharmac reports on prescription usage. Monthly broadband and mobile charges are widely
available and enable a more accurate assessment of communication charges. The New
Zealand Council for Educational Research (NZCER) keeps pace with the direct costs to
parents for children at primary and secondary schools and the Survey of Income,
Expenditure and Fees (SIEF) carried out by Early Childhood Education (ECE) Services
provides a wealth of financial information on ECE including fees and subsidies. Other
databases were also considered but not used in the final calculation.
7For the other six budget items, HES data was used. In this review it was taken from the most
recent HES 2016. It was purchased from Statistics NZ, covering expenditure categories and
sub-categories for the two adult with two dependent children household type by income
decile, average over deciles 1 to 5 (average of the lower half of household incomes for this
household type). All HES based expenditure estimates in this review used the averages for
households that had reported expenditure. The 2016 category and sub-category values were
inflation adjusted for the year to June 2017 using the Consumers Price Index (CPI) to reflect
2017 cost levels for the two adult and two dependent children household type.
The other critical factor that the review had to incorporate was the new Government’s
Families Package designed to reduce child poverty in New Zealand. The package boosts the
incomes of low- and middle-income families with children by increasing the Family Tax
Credit and raising the abatement threshold. The package contributed to reducing upward
pressure on the level of the living wage.
The 2018 Living Wage
The 2018 Living Wage was calculated item by item as the foregoing text has explained. A
weekly total comprising the addition of the agreed estimates for each of the 12 items was
prepared. This is a household total, not an individual total. The net weekly total was then
multiplied to become an annual net total. The gross income required to receive the net
amount was then calculated. This was a detailed calculation that took into account the
effects of income tax, tax credits (including the latest Families Package), childcare support
and the accommodation supplement. Finally, the hourly rate was derived by dividing the total
gross household income by 52 (52 weeks in a year) and then dividing that result by 60
(representing 60 hours per week or one full time working parent and another halftime/20
hours per week working parent, i.e. 1.5 fulltime workers).
The item estimates showed the following weekly expenses: Food $212; Clothing and
footwear $48.45; Actual rentals for houses $332; Household energy $72.14; Household
contents and services $39.13; Health $23.45; Transport $131.56; Communication $31.28;
Recreation and culture $92.12; Education $44.80; Miscellaneous goods and services $72;
Other expenditure $70. NB. See the main text for tables.
These itemised results led to a total weekly budget estimate for a household of two adults
and two dependent children of $1,169. This multiplied to an annual net total of $60,784,
which in turn required an annual gross income of $64,059 to be earned by two adults over
60 hours per week. That produced an hourly rate of $20.53. As in previous years, the final
figure was rounded to the nearest 5 or 10 cents mark to provide, in this case, a 2018 Living
Wage figure of $20.55.
This produces a disposable household income that appropriately sits between median
household income and the poverty thresholds. It is 73 percent of median disposable
household income in New Zealand and 61 percent of the mean disposable income for
households with two adults and two children respectively.
This estimate ($20.55) is $4.05 above the new (1 April 2018) minimum wage, or $162 per
week. The difference between the two wage settings is 24.5 percent of the minimum wage.
Around a third of wage and salary earners in New Zealand are below the living wage rate.
On this rate, a single earner working full-time would have a gross income of $42,755.
8The positive impact of the Families Package on lowering the expected level of the living
wage for 2018 is quite apparent. If it was not forthcoming, then the hourly rate with the more
precise calculations would be $22.45 instead of $20.55. The difference is almost $2 an hour.
9Introduction
The first Report on measuring a New Zealand Living Wage was launched during February
2013 (King and Waldegrave 2012) and took effect 1 July that year. The movement leading to
that launch and the advocacy to promote a living wage since, has been consistent, had
widespread media coverage and become well-known among New Zealanders. Wellington
City Council has made a commitment to seek accreditation as a Living Wage Employer
during its current term and has already lifted the wages of directly-employed staff, as well
contracted cleaners and security guards. The New Zealand parliament and Auckland City
Council have committed to the first step for their directly employed workers (not yet the staff
of organisations they contract). Cleaners and catering staff working in parliament will move
to a living wage as their contracts are renegotiated over this year and next.
The business economic group BERL, the Wiri Licensing Trust and the New Zealand Nurses
Organisation are three of an increasing number of organisations and small businesses who
are accredited Living Wage Employers, while energy company Vector Ltd has become the
first large corporate enterprise to become accredited. The recent Deloitte BusinessNZ
Election Survey August 20171, reported that of the 575 businesses taking part, a majority,
albeit slim (44% to 43 % with 14% unsure) said they support the concept of a living wage
and of those who did, 91% would be prepared to pay a living wage in the near future (p.63).
New Zealand unfortunately, is a low wage economy when compared with like countries,
being 18th on the OECD’s ranking of average wages out of 35 countries (OECD 2018).
Those with wage levels lower than New Zealand are largely Central and Eastern European
countries. Australians on average earn 32 percent more than New Zealanders, Canadians
22 percent more and British workers 9 percent more. It therefore figures that Australia has
had little interest in a living wage movement, while the UK, Canada and New Zealand have
developed strong movements. New Zealand being the laggard in wage levels. It is sobering
to note the Ministry of Social Development’s Household Incomes in New Zealand report
finds that 40 percent of children in poverty have at least one adult in their family in full-time
employment or self-employed (Perry, 2017) p144. This is an important context for a living
wage movement.
This report discusses the income research carried out by the Family Centre Social Policy
Research (FCSPRU) to provide an empirical basis for determining the level of a living wage
for New Zealand, and its annual adjustments in relation to wage movement in the market. A
clear empirical basis for setting the living wage has to draw on the most up to date data
available on the range of items required to live with at least minimal comfort and enable
participation in society. It must be transparent and clearly understandable for it to be drawn
upon by New Zealand businesses and organisations. As such, it needs to relate to living
wage calculations in like countries and stand up to the same sort of assessment and
scrutiny.
The Ministry of Business, Innovation and Employment (MBIE) using their Strategic Research
and Evaluation, Labour Group, carried out an analysis of calculations in our initial report
(ibid) for the then Minister of Labour Hon Simon Bridges. They concluded that:
“The data used to calculate the LW has been carefully constructed and the methodology is
comprehensive” and
1https://www.businessnz.org.nz/__data/assets/pdf_file/0006/129345/Deloitte-BusinessNZ-Election-
Survey-2017.pdf
10“The methodology makes reasonable assumptions about costs (eg household will be renting
not buying homes)” (MBIE 2013)
The living wage is defined by Living Wage Movement Aotearoa NZ as:
the income necessary to provide workers and their families with the basic necessities of life.
A living wage will enable workers to live with dignity and to participate as active citizens in
society.
It is the second sentence that distinguishes the living wage from the ‘poverty’ or ‘income
hardship’ thresholds. Participation refers to more than survival on the basic necessities,
because it involves the ability to participate socially and even consider the future like a
modest insurance policy. It embraces small but important things like being able to pay for
children to enjoy a school trip, having a computer in the home and being able to mix with
friends recreationally, albeit modestly.
Five Year Measurement Review
The first report calculated the living wage using information about household expenditure
available from secondary data sources such as the Statistics New Zealand Household
Economic Survey (HES), the annual Food Cost Survey carried out by the University of
Otago Department of Human Nutrition, rent levels from the Rent Bond database published
by the Ministry of Business Innovation and Employment (MBIE) and advertised childcare
costs. The databases that provided the food, housing and childcare expenditure items can
be conceived of as needs-based. They provided minimum estimates to meet the item costs.
The estimated costs of all other items were based on the average of the expenditures on
those items of households whose incomes were in the first five deciles, or bottom half, of the
income distribution for households with two adults and two dependent children, as reported
in the HES. HES records what households actually spend within various income deciles,
rather than measure need per se. Needs-based calculations for these items were not found.
The expenditure items selected then and for this review, were from HES and included: food;
clothing and footwear; actual rent costs for housing; household energy; household contents
and services; health; transport; communication; recreation and culture; education – primary
and early childhood; miscellaneous goods and services; and other expenditure e.g.
exceptional emergencies, non-mortgage interest payments. In line with research in other
countries, expenses were calculated for a household of two parents and two children with
one full-time adult earner and another part-time earner on half full-time hours.
The total of all estimated item costs represents the amount of disposable income required to
meet those costs. The corresponding amount of gross income required to produce that
amount of disposable income is identified in a calculation that takes into account the effects
of KiwiSaver contributions, income tax on the two incomes, tax credits based on the total
household income, and the Accommodation Supplement entitlement (if any). The total
household gross income then forms the basis for calculating the living wage hourly rate. The
hourly rate is derived by dividing the total gross household income by 52 (52 weeks in a
year) and then dividing that result by 60 (representing 60 hours per week or one full time
working parent and another halftime/20 hours per week working parent, i.e. 1.5 fulltime
workers).
The original living wage rate in 2013 was set at $18.40 per hour, which if earned by 1.5 full-
time adults over the course of the year would be sufficient for a household of 2 adults and 2
children to live modestly and participate in society. The FCSPRU with the Living Wage
11research peer group decided that because the living wage was a wage in the market, the
updates should relate primarily to movements in wages. The movement in the average
ordinary time hourly rate, as provided by Statistics New Zealand’s Quarterly Employment
Survey (QES) was chosen to set the level for each annual update. However, it was also
agreed that every five years, the methodology would be reviewed and if new databases or
information sources enabled improved accuracy of the estimates, they would be
incorporated. It was also stated in the original report that if government transfers, particularly
through tax changes occurred, then they would need to be incorporated into the following
year’s living wage adjustment.
This year 2018 is the year set aside for the first measurement review. We have found new
and appropriate information sources and databases that enable us to estimate more items
from a needs-based perspective. Otago University’s Food Cost Survey and MBIE’s Rent
Bond database continue to provide the best estimates for food and rent costs respectively.
Otago University Wellington’s Housing and Health research programme, the Building
Research Association of New Zealand (BRANZ) Household Energy End-Use Project (HEEP)
and the Institute of Professional Engineers (IPENZ) Multi-disciplinary investigation of energy
use in New Zealand households provides a more accurate basis to establish the energy
consumption in Kilowatt hours (kWh) required to maintain a three bedroom house at a
healthy temperature throughout the year and also meet other energy requirements.
The Ministry of Health’s service utilisation information collected from District Health Boards
(DHBs) and Primary Health Organisations (PHOs) provides GP visits by age group and fees.
Pharmac reports on prescription usage. Monthly broadband and mobile charges are widely
available and enable a more accurate assessment of communication charges. The New
Zealand Council for Educational Research (NZCER) keeps pace with the direct costs to
parents for children at primary and secondary schools and the Survey of Income,
Expenditure and Fees (SIEF) carried out by Early Childhood Education (ECE) Services
provides a wealth of financial information on ECE including fees and subsidies. Other
databases were also considered but not used in the final calculation. The information and
data sources considered for each expenditure item are set out in figure 1.
The HES data in this review was taken from the most recent HES 2016. It was purchased
from Statistics NZ, covering expenditure categories and sub-categories for the two adult with
two dependent children household type by income decile, average over deciles 1 to 5
(average of the lower half of household incomes for this household type). All HES based
expenditure estimates in this review use the averages for households that have reported
expenditure. The 2016 category and sub-category values have been inflation adjusted for
the year to June 2017 using the Consumers Price Index (CPI) to reflect 2017 cost levels for
the two adult and two dependent children household type.
The other major change that needed to be factored into the review of the measurement of
the living wage was brought about by the new Government, in late December 2017,
announcing the Families Package (Treasury 2017) as part of the Prime Minister’s
commitment to reduce child poverty in New Zealand substantially2. The package boosts the
incomes of low- and middle-income families with children by increasing the Family Tax
Credit and raising the abatement threshold. Furthermore, increases to the Accommodation
Supplement were also announced. These contribute to reducing upward pressure on the
level of the living wage.
2https://www.parliament.nz/en/pb/bills-and-laws/bills-proposed-laws/document/BILL_76267/child-
poverty-reduction-bill
12Where quarterly reporting data is used, this report bases calculations on the same annual
period as the original Report, i.e. June to June. In such cases the living wage estimate for
any particular year uses data for the year to June for the previous year.
Figure 1. Information and data sources included in the review.
Data sources for review
Expenditure
categories from HES Original
plus childcare sources Sources used for review
chosen
Food cost
Food • Food cost survey / HES
survey
Clothing and footwear HES • HES
Actual rentals for Rent Bond
• Rent Bond Database / HES
housing Database
Household energy HES • BRANZ, HEEP & IPENZ Energy Use in NZ / HES
Household contents
HES • Vero’s Content valuation guide / HES
and services
• Service Utilisation and GP fees data for 2016 from the
Ministry of Health
Health HES
• Pharmac reports of prescriptions
• HES
• The AA Running Costs Report
• Ministry of Transport’s “How New Zealanders travel”
Transport HES report
• Public transport monthly/weekly passes prices
• HES
• List of prices from main communication carriers
Communication HES
• HES
Recreation and culture HES • HES
• New Zealand Council for Educational Research
survey: School resources, culture and connections.
Education: Primary HES / Wellington.
and Early Childhood advertised • ASG calculator
Eucation childcare costs • ECE SEIF
• Annual ECE Data Summary Report
• HES
Miscellaneous goods
HES • HES
and services
Other expenditure HES • HES
The rest of this report, after setting out some explanation and rationale for the living wage,
takes the reader through the databases and calculations item by item, leading to an addition
of each item and the gross hourly rate required to meet a living wage for 1 September 2018.
Appendices provide a more in-depth explanation of the databases used and more
information about each calculation.
13Key concepts in the rationale of a living wage
A living wage is a market wage
A living wage is an individual market wage. If it is paid at a level to support a household of 2
adult + 2 children on 1.5 incomes as it is in New Zealand and most other countries where it
is applied, then it will be more generous to a household of 2 adults without children and more
stringent for a family with 3 or more children. It will be more generous to a family without a
disabled child than to a family with one. The market pays a wage for workers to do particular
jobs regardless of their family size, medical needs or other financial obligations. It has to be
pitched somewhere and living wage movements internationally pitch it in relation to a family
with children, because society is poorer if working families with children are still below the
poverty threshold.
This is in contrast to a targeted welfare transfer. Targeted welfare transfers such as the
domestic purposes benefit, the unemployment benefit and child tax credits are paid
differently according to family size, particular needs and housing costs. The living wage is
different. It is a market wage paid by employers, a market mechanism that is directed to lift
the incomes of low paid workers, and it certainly achieves that.
Both Treasury (Galt & Palmer, 2013) and Boston and Chapple (2014) reviewed the living
wage without reference to the broad literature in the field. They complain that the living wage
is not effective in reducing poverty for all people in society and advocate that targeted
welfare payments alone help the poorest people. This misses the whole purpose of a living
wage. It was never designed to reduce all poverty in society. Rather its aim is to ensure
people in paid employment are not in poverty and are able to participate in society. It is a
wage in the market place. Those employers who pay it have agreed to do so voluntarily.
Although it has an important role in addressing growing inequalities, it is not a welfare
transfer. People live in households but are paid in the market as individuals regardless of
their household obligations. As 40 percent of children in poverty have at least one adult
working full-time (Perry, 2017), a living wage contributes to poverty reduction substantially.
Furthermore, it is important that when people come off benefits and find work, they are paid
a decent wage.
The living wage is not mandatory
A living wage attempts to address wellbeing in our community and, in particular, the problem
of employees at the lower income end becoming increasingly socially excluded. Often, they
struggle to afford even basic necessities, let alone live with dignity and participate as active
citizens in society, despite the fact they are working full time.
Certain commentators, again the Treasury and Boston and Chapple (op.cit.), present
alarming figures of costs to the country if the mandatory minimum wage was lifted to the
level of the living wage. The network of organisations promoting the living wage in New
Zealand, have been very clear that the living wage is quite separate from the statutory
compulsory minimum wage. It is not suggested that the minimum wage be lifted to the level
of the living wage. They are quite separate entities and have different functions.
14The living wage is not compulsory, nor is the living wage movement anywhere in the world
seeking to make it compulsory. It carries moral force and tests business ethics. The living
wage enables an employer to know that what s/he pays a worker is sufficient for them to live
modestly and participate in society. It has proved very attractive to many employers and
studies show it pays off in terms of morale and productivity.
Household of 2 adults and 2 children
Of the three other main countries that have adopted living wage practices, two of them have
chosen a 2 adult and 2 child family as their base unit for calculating a living wage. Those two
are Canada (Richards et. al. 2008) and the US. The US is a little complicated in that the
rules vary from State to State and city to city but generally they apply the 2A+2C formula
(Maloney and Gilbertson 2013).
The UK is the only jurisdiction that uses weighted averages for different family types,
including single people through to couples with children (GLA 2013). The weighted averages
of single families, families without children and families with children skew the living wage in
the UK towards a household with less than 2 adults and less than 2 children. It has not been
adopted elsewhere in the world probably for that reason.
The household composition of 2 adults and 2 children chosen in the original Report is pretty
much in line with other jurisdictions for good reasons. If a living wage is to enable workers to
live with dignity and to participate as active citizens in society, it must be sufficient for
families with children. In other words, the adult earners in the household between them need
sufficient income to be able to at least participate modestly in society with their children. If
two incomes, one being fulltime, can’t afford that, then it is less than a living wage. 2 adults
and 2 children were chosen as the household composition for these reasons and also
because it is a common NZ family size. Furthermore, it is close to the minimum average
sized family required to ensure natural population replacement.
The New Zealand living wage focus on a two adult and two child household has been
criticised as an example of poor targeting because single people receiving the living wage
rate were better off in equivalised disposable income terms than couples with children (Galt
& Palmer, 2013) (Crampton, 2015). But this criticism ignored the relationship between the
market and non-market components of the living wage (King, 2016). Unlike government
transfers, market wages are not targeted according to need: employers are not, for example,
expected to pay the sole income earner of a three-person household a multiple of what they
pay a single person doing the same job. The living wage has to be set on some basis, and
as noted above, it is transparently set in line with other jurisdictions to include one full-time
and one half-time income for a family with children to be able to participate modestly in
society.
1.5 incomes
The original Report chose two incomes because the Statistics New Zealand Household
Labour Force Survey (HLFS) results for June 2012 show that in 68.5 percent of households
with two adults and two dependent children, both adults were income earners. For the June
2017 quarter, both adults were employed in 74.5 percent of 2A+2C households (Statistics
NZ 2017). It chose 1.5 incomes to allow one parent to be home with their children for half a
working week however that may be divided.
15The hours worked to calculate a living wage does vary from jurisdiction to jurisdiction. The
Canadians chose 70 hours, 35 hours each for both parents, whereas the US formulas tend
to use the income of one parent in fulltime employment. The UK uses 1.44 incomes, not that
different from the New Zealand setting at 1.5. In the UK though, full time work is officially
38.5 hours and so they calculate 55.5 hours (38.5 + 17 hours).
The average of the four jurisdictions (USA 40 hours, UK 55.5 hours, New Zealand 60 hours
and Canada 70 hours) is 56.38, not that far from the 60 hours chosen in the original Report.
The parameters are judgements as to what is considered reasonable in order for a family in
New Zealand to live with dignity and to participate as active citizens in society.
16Calculating living wage estimates for each item
The estimate of necessary expenditure for each expenditure category in this review is based
on evaluation and comparison of available data and information sources as outlined above.
The commentary for each expenditure category includes reference to the associated HES
results alongside the results based on other sources of information. Further information
about the chosen methods of calculation are provided in the Appendices.
The HES tables used in this review are based on the averages of the expenditures of two
adults with two dependent children households over deciles 1 to 5 (average of the lower half
of household incomes for this household type) that actually reported having spent money on
them. This means that the averages for separate sub-categories and categories are usually
based on different numbers of households in each sub/category. As a consequence of this,
the sub-category averages in HES rarely add to the same value as the category total. This is
simply illustrated in Table 1 following, where the averages for clothing and footwear are
based respectively on the numbers of households that answered each of the two
subcategories (clothing and footwear). The category total is based on all those who
responded to both or either of the two sub-categories
Food
Food costs have been calculated from Otago University Food Cost Survey for 2017 using
the same procedure as used for the original living wage calculation. Food cost information is
published annually by the University of Otago Department of Human Nutrition (Dept. of
Human Nutrition, 2017). Three sets of estimates are produced to represent the costs of
meeting basic, moderate and liberal diets for each of the following categories
The estimated are calculated using the specified amounts of the food categories (e.g.
meat, bread, eggs, fruit, etc) needed for one week. These are based on the New Zealand
Food and Nutrition Guidelines and will meet the nutritional needs of most healthy people.
While the food categories are the same for men, women and children, the amounts are
appropriate for each age and sex group and vary between regions.
The costs are calculated assuming home preparation of meals and dishes and purchased
from supermarkets. Food preparation skills are assumed to be adequate, as are the use
of standard serving sizes.
The Basic cost category assumes that all foods will be prepared at home. It includes the
most commonly consumed fruits and vegetables and the lowest priced items within each
food category.
The mean of the various combinations of two adults and two children, based on children’s
pre-school and primary school ages (including intermediate school) was chosen. The
mean national figure is $212 per week. This is lower than the HES (expenditure) figure of
$225 which would have included households with older children and adolescents whose
food costs are higher than those of younger children.
17Clothing and footwear
The review has chosen to maintain the HES estimate of $48.40 for households reporting
expenditure on clothing and footwear as shown in Table 1. No needs-based estimate could
be found.
Table 1. HES Clothing and footwear
Average
CLOTHING AND FOOTWEAR: 2016 HES CPI adjusted weekly
to June 2017. 2A+2C households. Income deciles 1- Reporting
5. households
03.1 Clothing 43.36
03.2 Footwear 24.26
03 Total Clothing and footwear $48.45
Rents
Rent costs have been calculated from information provided by the Tenancy Bond
Database maintained by the Ministry of Business, Innovation and Employment (MBIE), as
in the original report. National average rents for three-bedroom houses at the top of the
bottom quartile have been calculated from the rent information included with the MBIE
rent bond data (MBIE 2017). The Tenancy Bond Database reports average (actual) rents
at the top of each rent quartile by region and area across the country.
The three-bedroom house is used because this is the most appropriate minimum number
of bedrooms necessary for the target household to avoid crowding. The Canadian
crowding measure, used by Statistics NZ, requires separate bedrooms for children of
different gender from the age of five years (see appendix).
The national average at 1 June 2017 is $332.003. This estimate is just five dollars above
the HES average of $327 (see Appendix 1., Table 16).
Household energy
Previously the HES database was used to estimate household energy costs. However, the
University of Otago Housing and Health research programme, the Building Research
Association of New Zealand (BRANZ) Household Energy End-Use Project (HEEP) and the
Institute of Professional Engineers (IPENZ) Multi-disciplinary investigation of energy use in
New Zealand households now enable us to establish the energy consumption in Kilowatt
hours (kWh) required to maintain a three bedroom house at a healthy temperature
throughout the year and also meet other energy requirements. Once the energy
consumption requirements in kWh for the target households in various NZ regions have
been estimated, the cost of that energy was calculated using information available from the
MBIE database of residential sales-based electricity costs.
Household energy costs have been estimated using the three bedroom house annual
energy requirements calculated by Lloyd (2006) (Howden-Chapman et al., 2012) using
3http://www.mbie.govt.nz/info-services/housing-property/sector-information-and-statistics/rental-bond-
data
18thermal modelling and the concept of ‘heating degree days’ to relate daily temperatures to
demand for fuel to heat a three bedroom house of 90-100 square metres in each of four
regions: Auckland, Wellington, Canterbury and Otago.
From the separate energy requirements for each of the four regions a weighted national
average energy requirement, and cost, has been calculated that fairly represents the
distribution of energy requirements across New Zealand, as shown in Table 2. and
described below.
A simple average of the energy requirements for the four regions covered by Lloyd (2006)
would give undue weight to the southern regions, which have fewer houses but higher
energy costs, and result in a disproportionally high average cost estimate, in this case
$83.32 per week.
The method shown in Table 2 divides the total energy required by the three-bedroom houses
in the four regions by the total number of such houses reported by Stats NZ from the 2016
Census. This produces a weighted average weekly energy cost of $72.14. This is ten
dollars higher than the HES estimate of $62.30 (see Appendix 1., Table 17) which may
reflect the inadequate heating of many New Zealand houses (O’Sullivan et. al. 2017).
Table 2. Calculation of weighted average household energy cost
Region Required No. 3 Total energy 2017 Weighted
energy brm (kwh) electricity average
per 3 houses price incl. cost per
brm line week
house charges
(kwh)
Auckland 9,500 181,860 1,727,670,000
Wellington 13,900 72,561 1,008,597,900
Canterbury 17,200 85,368 1,468,329,600
Otago 19,600 33,924 664,910,400
Totals 373,713 4,869,507,900
Average energy per 3 brm house 13,030 x 0.2879 = $72.14
(kwh)4
Household contents and services
The primary source of information for estimating expenditure on household contents and
services is the HES. It was proposed that the HES based estimates could be evaluated
against insurance company content valuation guide such as those provided by Vero5 by
depreciating the values to produce estimates of annual costs associated with those items.
However, selecting the items involved arbitrary judgements and the depreciation produced
unconvincing results.
Another potential source of information identified was the New Zealand Now cost of living
calculator, but as the expenditure estimates produced by this calculator are based on the
HES, it is not a viable alternative source of expenditure information to the HES.
4 This is the quotient of 4,869,507,900 divided by 373,713.
5 https://www.vero.co.nz/documents/cis/domestic-contents-valuation-guide-2014.pdf
19In view of the uncertainty surrounding this method of verifying the HES total, it seems
prudent to continue to base the estimate on the HES. The weekly total average of $39.13
shown in Table 3 is used.
Table 3. HES Household contents and services
Average
HOUSEHOLD CONTENTS AND SERVICES: 2016 HES weekly
CPI adjusted to June 2017. 2A+2C households Reporting
households
05.1 Furniture, furnishings and floor coverings 23.32
05.2 Household textiles 7.37
05.3 Household appliances 21.33
05.5 Tools and equipment for house and garden 10.13
05.6 Other household supplies and services 14.99
05 Total Household contents and services $39.13
Health
Previously the HES database was used to estimate household health costs. However, GP
utilisation data is available as are Pharmac reports. Information about GP fees is collected
annually in February by the Ministry of Health from all district health boards (DHBs) and
service utilisation information is collected quarterly from PHOs (Primary Health
Organisations). The total number of nurse and GP visits are broken down by age group,
quintile, ethnicity and gender; also available is the average number of nurse and GP visits
per person age group, quintile, ethnicity and gender6. Over all age groups, the average
number of GP consultations per person is 3.0.
In the target family of two adults and two dependent children, one child is preschool and the
other at primary school are eligible for free GP visits7 because they are under 13 years.
Some GPs do charge and the information about GP fees reports small average fees for
children in this age group. Children aged under 13 are also not subject to co-payments for
prescription medicines8.
Table 4. GP average annual service utilisation and fees by age group
Average Average
Average
Household GP visits annual GP
Age group consultation Age group
members per consultation
fee $
annum cost $
Children 1 3.8Table 4 summarises the GP utilsation rates and fees for the child and adult age groups and
the resulting annual and weekly costs. Average annual GP fees yield an annual GP visit
cost of $183.75 or $3.53 per week if each member of the family attended a GP for the
average number of times a year for those in their age group.
Pharmac reported that in 2016 there were 44.4 million prescriptions of funded items9 and
13.2 million GP consultations6, making an average of approximately 3.4 prescriptions per
patient consultation. The 13.2 million GP consultations divided by the population of 4.7
million10 represents an average of 2.8 consultations per person. This is close to the average
of 3.0 reported by the Ministry of Health, above.
With a total average of 5.4 GP visits per annum (2.7+2.7, Table 4) by household adults and
a pharmacy charge of five dollars per prescription, the target household will, on average,
spend 5.4 x 3.4 x 5 = $91.80 dollars per annum on prescription items, or $1.77 per week.
Added to the prescription part charges, we have allowed for two repeat prescription GP
charges at $20 totalling $40 for the year and $0.77 per week.
Combined with the GP consultation average weekly spend of $3.53, the total average
weekly cost of GP associated primary health care and associated medication is $6.07.
Finally, dental costs for the two adults are estimated based on an average of costs
associated with treatments covering extractions, fillings, cleaning and xrays of $14311. For
two adults having such treatment once a year the annual cost would be $286.00, or $5.50
per week.
In total, the weekly GP, medication and dental costs are estimated to be $11.57.
Table 5. HES Health
Average
HEALTH: 2016 HES CPI adjusted to June 2017. weekly
2A+2C households. Income deciles 1-5. Reporting
households
06.1 Medical products, appliances and equipment 13.63
06.2 Out-patient services 52.74
06 Total Health $34.13
We can then add to that non-prescription costs. HES data reported in Table 5 indicates
$13.65 a week medical products, appliances and equipment. If we deduct from that the
$1.77 for prescription costs, it leaves $11.88 to cover other non-prescription medicines and
products such as pain relief, cough remedies, sticking plaster, and so on. Weekly health
costs then come to $11.57 + $11.88 = $23.45.
The $23.45 is almost one third less than the estimate for expenditure by households
recording spending on health in the HES, which might be due to health costs being an
irregular expense and therefore more difficult to quantify accurately over time. However, the
significance of this difference is lessened by the government’s plan to reduce GP
consultation fees for adults to $10 for non-Community Services Card holders. This means
that the costs of primary health care are very likely to fall in the near future.
9 https://www.pharmac.govt.nz/assets/annual-report-2015-2016.pdf
10 https://www.stats.govt.nz/topics/population
11 https://www.enz.org/dental-costs-in-new-zealand.html
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